The end of year price run that carried through January has stalled and is in rapid decline. In mid-February the price tumble started after lasting more than 2 months above $1000 /ton. Depending on the index referenced, the current hot roll price is $755 to $810/ton after two mills announced price increases to stop the fall. This represents a $250 /ton drop (or 25%) in the value of steel in just three to four weeks. Given the volatility we have all experienced during the last year, spot buyers are jumping into buys at what some perceive as a new low price point, while those with mill contracts are focused on utilizing their contract buys. It appears the mill strategy of offering spot discounts for large volume buys, 10,000 plus tons only offered to contract customers, continues in the marketplace.
Mills are advertising smaller, multiple-coil spot prices at a premium compared to weekly index values, or at best at the current published index value. Those capable of buying the large spot ton lots are doing so only with known end use as many expect further price declines in the near term.
Imports
As a reaction to the price runup that started in October of last year, imports were up month on month and year on year for both December and January. There is word of significant trader inventory, especially plate inventory, in the Gulf region. The expectation is that imports will flatten going forward on the declining US market price.
Mills
After months of mills holding steel mill capacity utilization below 75%, in mid-January capacity utilization started ramping, now standing at 78.1%. Mill lead times have shortened down to 3 to 6 weeks, depending on the mill. The timing of all this together with the large lots purchased late last year, and still being offered by mills now to fill their books, suggests more volatility yet to come.
Demand
As it has been throughout the last year, the bright spot in all this continues to be steady demand for steel in the US. Individual industries lag or surge, but the aggregate demand shows an economy supported by infrastructure spending and manufacturing. US consumers have taken on debt but continue to buy, a behavior not seen in other industrialized countries. Wage growth exceeds inflation and new job creation remains high. Many suggest the US housing market may relax a bit, which would further support consumer fundamentals. In contrast, market watchers have serious concern for China’s housing crisis, manufacturing volume decline and rising unemployment. Japan, Germany, and the UK meet all the benchmarks of being in recession, but the US economy continues to push forward. All in all, an amazing feat for the US following the global supply chain disruption and economic malaise brought on by the pandemic.
Outlook
One thing is clear when you compare the US steel market to others around the world. We have the greatest price volatility and there is nothing in the market horizon appearing to dampen this. Demand is steady, mills are increasingly disciplined, and US buyers are consistently trying to beat market volatility through buy timing. The auto industry, the segment buying the most steel, locks in steel prices for a full year, while most other buyers reel under the financial and manufacturing uncertainty of weekly, monthly, and quarterly price volatility. The EU enjoys a much flatter price line reflective of steel making input costs and buyers that are more focused on manufacturing detail, as opposed to steel, as a source of margin or differentiation from their competitors. The mentality that steel is a source of margin for medium sized US manufacturers fundamentally drives our volatility cycle. This volatility hinders forward planning and its impact on bottom line performance is likely underestimated. Per historical trends, pursuing steel price stability and focusing on manufacturing as the real source of margin supports greater long term manufacturing profitability.